BP's Stock Buyback

BP has two recently announced stock buyback programs, one for $8 billion and one for the "bulk" of the $10 billion it received from an asset sale. During the 3rd quarter of 2013, BP bought back 14 million shares a week, stepping that up to 22 million shares a week in the fourth quarter. So far this year, BP has been buying back an average of 37 million shares per week. With about 3.14 billion shares outstanding, BP would buy back all of its outstanding stock in about 85 weeks, although we doubt the buyback will reach that level.

EPS And Currency Risk

A recent report using results from 78 companies that do business abroad and quantified currency losses showed that these companies lost a combined $4.18 billion during the third quarter of 2013. The currencies that most affected earnings were the Japanese yen, Australian dollar, euro, and Indian rupee. Although that sounds bad, the reported loss in earnings during the 3rd quarter of 2012 due to currency fluctuations was $22.73 billion. The average loss in EPS by companies reporting currency losses was $.03.

Securitization Increasing

Securitization, the process of pooling different types of debt into bonds that have payments backed by the debt, is on the rise. Mortgage backed securities (MBS) and collateralized debt obligations (CDO) were blamed in part for the 2008 financial meltdown. In 2013, about $800 million of securitized debt was issued worldwide (excluding residential mortgages). Although a dramatic increase from the $200 million or so issued in 2009 and 2010, the total is far short of the more than $2.5 trillion issued in 2005 and 2006. Although regulators often argued about the evils of securitized debt, it also allows the market to pump lending into the system, which could help increase economic growth.

Fast News

We argued in the textbook that an efficient market reacts rapidly to new information. So how fast does the market react? Pretty quickly according to traders. Dow Jones & Co., publisher of The Wall Street Journal, announced a lawsuit against Ransquawk, a service that "scrapes" articles published online by Dow Jones and others and immediately squawks the news to its subscribers. According to Ransquawk, 8 of the largest 10 banks it the world use the service. Dow Jones argues that Ransquawk is misappropriating "hot news," an action that is not permitted under a 1918 Supreme Court ruling. Given that Ransquawk is a fee-based service, we must assume the banks using the service believe that the extra few seconds gained in hearing about the news is worth the price of the service.

U.S. Oil And Natural Gas Capital Spending

The American Petroleum Institute recently released projected capital spending on oil and natural gas projects in the U.S. through 2020 and the numbers are staggering. During 2014, an estimated $87.4 billion will be spent in the U.S., with spending declining to $75.0 billion in 2020. During the next seven years, a projected $568.4 billion will be spent on U.S. oil and natural gas projects. With the dollar amount being invested, we hope a careful capital budgeting analysis is being performed on these projects.

IRS Changes Deduction/Capitalization

Starting January 1st, companies face new regulations about whether spending on fixed assets is an expense or capitalized, which means the spending is depreciated over time. As with any other regulation, there are loopholes. For example, companies with audited financial statements can deduct $5,000 per invoice. This means an audited company could order 10 new computers at $4,900 each on 10 separate invoices and deduct the expense immediately. If the company made the same purchase on one invoice, the $49,000 would be capitalized and depreciated. Remember, while depreciation itself is not a cash flow, it does create important tax shield cash flows that we must take into account in capital budgeting.

Hertz Adopts Poison Pill

On Monday, Hertz announced that it was adopting a 1-year poison pill after "unusual and substantial activity" in the company's stock. All shareholders of record on January 9, 2014 will receive one preferred purchase right for each share of common stock owned, which will make any potential acquisition more expensive. The rights will become exercisable if 10 percent of Hertz is acquired by one person or group, or in the case of a passive institutional investor, 15 percent of Hertz common stock is acquired. Today, it became known that Carl Icahn had purchased 30 to 40 million shares of Hertz through stock and derivative investments.